Friday, August 3, 2012

How to plan your investments once you are retired?

This is a guest post written by Manikaran Singal who is a certified
financial planner and runs a personal finance blog - Good Moneying.
Retirement is very important and critical stage in one’s financial
life. This stage can be made more enjoyable where you relax, spend
time with family, pursue hobbies if you have properly planned for
that. But it can be most horrifying phase also where your regular
income stream is no longer available, with no pension provision and
where you have not saved enough to take care of your retirement needs.
Due to the various challenges and risks associated with retirement,
we recommend retirement planning should be given its due importance
and starts as soon as possible.
Retirement Planning works in 3 steps – Accumulation – Preservation-Distribution.
Accumulation is the stage where we invest to generate a decent corpus
which is assumed to take care of us during retirement years. This
accumulation we do till retirement.
In Preservation stage we become cautious about our accumulated corpus
and we start coming out of risky asset classes and start shifting the
corpus into debt, though savings doesn’t stop during this stage also,
as our regular income stream is intact.
Distribution is the stage when we make arrangements to use the corpus
through interest, dividends and withdrawing capital which we have
accumulated.
In the complete retirement planning, distribution is the most
important of all, as all our efforts of accumulation and preservation
were directed towards this stage only. With a regular income stream no
longer available, the savings made over one’s working years now have
to provide for all needs. Now your investments need to create a
paycheque for you. In accumulation and preservation stages the
mistakes can be ignored as you were getting regular income, but at
distribution stage, small mistakes can cost huge.
Through this article, I will be discussing with you on the
distribution stage of retirement planning and how you can plan your
investments once retired.
1. First step is to prepare you on the risks front. Like :
a) Longevity risk: We don’t know for how long we are going to
live. Whatever life expectancy you have assumed during accumulation
stage may not be correct. If you outlive that age and not used your
corpus judiciously you may find yourself in financial soup.
b) Health risk: At this age probability of health problems is much
more. We don’t know till when health remains favorable on our side.
And when it gets unfavorable how much of our accumulated corpus it may
wash away.
2. Have a look at your expenses.
This is very important as the ultimate target is about to generate
comfortable income stream from the corpus to meet the basic and
desired expenses easily. Here you may divide your expenses in 4 parts:
Basic/desired/on dependents if any/Loan EMIs if any. Basic would
include the family’s general and unavoidable expenses which may
include the family gifts on various festivals/occasions, desired is
what you want to do after retirement like going on annual or bi annual
vacations, pursuing some hobby, some charitable or religious activity
etc., On dependents means…situations where children are still studying
or are not yet settled in life etc. and Loan EMIs.
3. Investment Options.
When you have calculated how much is required, now is the time to look
out for the options where you may park the lump sum amount to start
getting regular income. Here one thing has to be noted that one should
not ignore the growth aspect in investments and should give equal
importance to that. To add to it, one should not get into wrong
products with the lure of making fast money in the name of growth.
Just reminding you again that mistakes made at this stage of life may
prove very costly.
Make 3 investment buckets by investing corpus in different percentages.
Basic Bucket (50% -60%): Looking at the monthly requirement and
pension inflow if any, one has to plan to fulfill the gap, for which
one may use the products like Post Office Monthly Income scheme,
Senior Citizens savings scheme , bank fixed deposits with
monthly/quarterly pay-out options, Immediate annuity etc. I mean use
those products which can supplement your monthly inflow. But here do
keep in mind the taxability aspect also. All the so called safe
instruments are taxable. So where the taxation crosses the
acceptability criteria, then you may use Mutual funds Monthly income
plans or park the amount in debt mutual funds and start systematic
withdrawal plan, but please note in the latter you are withdrawing the
capital part of corpus which should be last resort.
Health Bucket (10%-15%): After arranging for your current monthly
requirement, put some percentage of your corpus into debt mutual funds
or cumulative fixed deposits as a health fund which will take care of
your those medical emergencies where expenses jumps over health
insurance coverage.
Growth Bucket (20%-25%): Put the balance corpus or at least 20% of the
total corpus in equity oriented Mutual funds diversified or index, to
cope up with the inflation aspect and After every 5th year transfer
the growth portion into the basic bucket, so the monthly income can be
supplemented and put it in line with the increased expenses.
Some Do’s and don’ts after Retirement.
Do review your financial situation every year.
Do buy adequate health insurance coverage for yourself and your
spouse. Count the annual premium in the basic expenses.
Don’t buy or gift any investment product to any of your family member
other than you or your spouse. Avoid gifting child plan to
grandchildren etc. Don’t part with your savings in your lifetime. You
will be soft emotionally gullible target to the sellers. So beware.
Do keep working even after retirement.
Shocked!! But in many cases it becomes inevitable especially when you
still have dependents, or paying Loan EMIs. The idea is not to enter
retirement phase with the burden of Debt and dependents, and not to
use the nest egg on these areas. Also please understand that stock
trading is not working.
Do take good care of your health. If at all you have any health
problem better to take proper treatment. Many times I have seen people
ignoring the health aspects due to the finances involved in the
treatment. But please understand that your health is equally important
for your wealth.
Don’t overspend in retirement if you have not over invested while working.
Don’t put your retirement corpus into Real estate due to the illiquid
and unregulated nature of investment.
Retirement planning includes much more than just investing. It needs
some behavioral adjustments also. The ultimate goal is steady,
dependable and lasting income. With careful planning we can balance
the needs of inflation protected income and long term growth during
retirement.